blanchard_ch03

# Figure 39 shows the new supply schedule the same one

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Unformatted text preview: falls to \$1.00 a bar, and the quantity increases to 15 million bars a week. You can see why by looking at the quantities demanded and supplied at the old price of \$1.50 a bar. The quantity supplied at that price is 20 million bars a week, and there is a surplus of bars. The price falls. Only when the price is \$1.00 a bar does the quantity supplied equal the quantity demanded. Figure 3.9 illustrates the effect of an increase in supply. It shows the demand curve for energy bars and the original and new supply curves. The initial equilibrium price is \$1.50 a bar, and the quantity is 10 million bars a week. When supply increases, the supply curve shifts rightward. The equilibrium price falls to \$1.00 a bar, and the quantity demanded increases to 15 million bars a week, highlighted in the figure. There is an increase in the quantity demanded but no change in demand—a movement along, but no shift of, the demand curve. A Decrease in Supply Start out at a price of \$1.00 a bar with 15 million bars a week being bought and sold. Then suppose that the cost of labor or raw materials rises and the supply of energy bars decreases. The decrease in supply shifts the supply curve leftward. The equilibrium price rises to \$1.50 a bar, and the equilibrium quantity decreases to 10 million bars a week. We can now make two more predictions: 1. When supply increases, the quantity increases and the price falls. 2. When supply decreases, the quantity decreases and the price rises. Price (dollars per bar) 1. When demand increases, both the price and the quantity increase. 2. When demand decreases, both the price and the quantity decrease. FIGURE 3.9 67 The Effects of a Change in Supply 3.00 Supply of energy bars (original) Supply of energy bars (new) 2.50 2.00 1.50 1.00 Demand for energy bars 0.50 0 5 10 25 30 15 20 35 Quantity supplied (millions of bars per week) Price Quantity demanded (dollars per bar) (millions of bars per week) Quantity supplied ( millions of bars per week) Original New 0.50 22 0 7 1.00 15 6 15 1.50 10 10 20 2.00 7 13 25 2.50 5 15 27 Initially, the supply of energy bars is shown by the blue supply curve. The equilibrium price is \$1.50...
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## This note was uploaded on 04/04/2012 for the course ECON 251 taught by Professor Blanchard during the Spring '08 term at Purdue University-West Lafayette.

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